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Tuesday, September 3, 2013

Tier 5: Opportunity Cost

PVP fleets dwindled and Minmatar Teamspeak turned into a ghost town last night, as the militia reached Tier five and even the most dedicated of pvpers hit the mission trail. (At 80-110k LP per mission, it’s hard to resist, even if mission running makes you want to tear out your eyes and drink hot acid.)

I’ve been rather amused by some very interesting economic discussions by various Minmatar. There’s the notion that since certain items can be obtained so easily from the LP store, they are extremely cheap or altogether ‘free.’ I was informed last night that Stabber Fleet Issues cost us “only 25 million ISK.”

The idea that certain items are ‘free’ or extremely ‘cheap’ based on how much ISK you put into them is not new or uncommon in EVE. Many tech 1 items sell below the cost to make them because some Manufacturers believe that because they built them with minerals they mined, they are ‘free.’

In reality, anything you sell at a price lower than you could otherwise sell it at, nets you a loss, regardless of how much time or ISK went into you obtaining it. The official ‘term’ for this is “opportunity cost.”

For example, if I had offered the Minmatar talking about their 25 million ISK SFIs 30 million ISK for them, would it have been a good deal? After all, it would be 5 million ISK profit per unit, right?! That’s a great margin! Actually, no. They could easily sell them for 47 million in Jita, so they would actually be taking a 17 million ISK (or more) loss for each ship.

Unfortunately, while I make the idea of opportunity cost sound simple and uncomplicated, it is actually just the opposite. There are other factors and angles involved. For example, the factor of time.

So, suppose that you realize that if you just wait a while, you could sell those Stabber Fleet Issues for 50 million ISK PU. So, you put them up for 50 million, waiting for the Minmatar to crash back to Tier 2, and the prices to start rising.

You have around a billion ISK in ships invested, (20 Stabber Fleet Issues) and you leave them up for a month, without selling a single one. Finally, you sell them at the end of the month, as the Amarr make a comeback and take over all the things. So, you just made 25mil X 20 units = 500 million ISK profit, right? Well, wrong again.

Say that in your normal trade practices, you can usually turn about 15% profit each week. This means that if you had taken that 1 billion ISK, and invested it in your normal operations, you would have made:

Week 1: 1,000,000,000 * 0.15 = 150,000,000 ISK

Week 2: 1,150,000 * 0.15 = 172,500,000 ISK

Week 3: 1,322,500,000 * 0.15 = 198,375,000 ISK

Week 4: 1,520,875,000 * 0.15 = 228,131,250

A whopping grand total of 749,006,250 ISK profit for the month based on an initial 1,000,000,000 ISK investment.

That means that the time factor involved in selling the Stabber Fleet Issues at 50 million ISK PU, actually cost you almost a quarter of a billion ISK in potential income for that month. It may have actually been beneficial to sell them more cheaply, quickly, and reinvest that ISK then to hold out on a bigger profit margin.

There are many other factors involved, but the primary point is that the cost of an item you purchase from the LP store cannot be measured simply in terms of how much ISK you paid for it straight up. Failure to consider and analyze opportunity cost is exactly how smarter traders make ISK off you. =)

Anyway, happy cashing out. And if anyone wants to sell me a pile of SFIs for 30 mil, I'm all ears. =D

4 comments:

This is why I just bank LP when we're at high tiers. I just watch it pile up, then eventually, when we come crashing down again, I'll wait a little longer, and then find the high profit items (this last crash there were things where the LP invested was 4,000 ISK per or more) and then I'm laughing all the way to the bank. $$

Even you miss a bunch of important things with that post. For instance how much time did it take to set up those sell orders versus your "normal trading" If you are Isk constrained you are correct that selling them cheaper and reinvesting might be better, but if you are time constrained and have the extra isk, then this is still extra profit. Again the amount of effort that you have to put in has to come into the equation. Selling 10 built items might be easier and take less time than the transportation and selling of the raw materials from where he/she obtained them, to where they are highly profitable. Again in the eve economy is the item worth more or less than the buy or sell price of the minerals? it may very well be below the sell price of the minerals, but above the buy, and therefore a good deal for someone who doesn't want to deal with that number of sell orders, or who doesn't have the skill for many of them.

TL;dr : I am not saying that the author is wrong, but that the complexity goes much further than they even hint at.

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